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Economics · Oct / Nov 2022 · Paper 22 · Question 5

0455

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The question as text

While 15% of US exports go to Mexico, 80% of Mexico’s exports go to the US. In 2019, the US government imposed some methods of protection to reduce imports from Mexico. This US action caused a fall in Mexico’s foreign exchange rate. Despite a rise in its inflation rate, Mexico’s central bank reduced the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020.

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  • 5(a)[2]

    Identify two methods of protection. Tariffs (1)

    quotas (1)

    subsidies (1)

    embargo (1).

  • 5(b)[4]

    Explain two reasons why a government may want to reduce imports. Logical explanation which might include: To improve the current account of the balance of payments (1)

    reduce a current account deficit (1)

    move from a deficit to a surplus / move to a balance / achieve balance of payments stability (1)

    increase net exports (1). To increase GDP / economic growth (1)

    switch demand from imports to domestically produced products / increase demand for domestically produced goods / protect domestic firms (1)

    allow infant industries to grow (1)

    Prevent dumping (1)

    the sale of goods from abroad at below cost / predatory prices (1). To increase employment / reduce unemployment (1)

    to raise living standards (1). To reduce dependence on other countries / make the country more independent (1)

    as risk of supplies being cut off / price being increased (1). To stop / reduce a fall in the exchange rate (1)

    less of the currency will be sold to buy imports (1). 4 One mark for each of two reasons identified and one mark for each explanation. So, for improve balance of payments reason, there is a maximum of 2 marks.

  • 5(c)[6]

    Analyse how a fall in a country’s foreign exchange rate could increase its inflation rate. Coherent analysis which might include: Raise import prices (1)

    increase price of imported raw materials / capital goods (1)

    increase costs of production (1)

    if demand is inelastic (1)

    cause cost-push inflation / imported inflation (1). Reduce export prices (1)

    increase demand for exports (1)

    increase export revenue if demand is elastic (1)

    switch demand for imports to domestic products (1)

    increase total demand (1)

    cause demand-pull inflation (1).

  • 5(d)[8]

    Discuss whether or not a decrease in the rate of interest will increase a country’s GDP. In assessing each answer, use the table opposite. Why it might:

    reduce saving
    increase borrowing
    increase consumer spending
    raise total demand
    encourage firms to produce more
    increase investment
    raise ability of firms to produce more Why it might not:
    households and firms may be worried about the future and so may not spend more
    there may be a culture of saving
    households and firms may think the cut is only temporary
    the rate may initially have been low
    may spend more on imports, increasing other countries’ GDP
    an economy may initially have been at full employment. Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content. Guidance For an answer which shows awareness of how a change in the rate of interest may affect GDP but writes about an increase in the rate of interest = maximum of 2 marks.
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